FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the US corporate sector has been on an interesting ride over the pre- and post-crisis era.
Key Quotes
“After rising to all-time highs as a percentage of GDP in the pre-crisis period, corporate earnings plunged during the recession of 2008-2009, only to roar back in the early recovery years 2010-2011. Since then, however, real corporate revenue growth has been unsteady, as has earnings growth.”
“The last time companies in the S&P 500 experienced a similar peak/decline in ROAs was during the mid-to-late 1990s. This similarity is potentially troubling because it invites comparisons to the problems suffered by the corporate sector during the late-cycle stage of that expansion. Do recent trends suggest the corporate earnings cycle is losing its mojo? In our judgment, the answer is probably not, or at least if it is, it reflects a different set of underlying drivers.”
“For one, operating margins during the late 1990s were flat-to-falling, whereas margins more recently have been flat-to-rising. Second, if it is not margins weighing on ROAs, it must be top-line revenue growth. And indeed, for only the fifth time in 30 years, and the second time in the post-crisis period, the year-on-year growth rate of real corporate revenue for the median S&P500 company has been flat-tonegative. This pattern is the mirror image of the late 1990s, when margins were compressing but revenue growth was robust.”
“Indeed, the stable-to-rising rising trend in median margins is one of the more remarkable features of the corporate sector during the post-crisis period. The disappointment is real revenue growth, which has twice experienced a mild ‘revenue recession’ during the postcrisis period after never having experienced one over the prior 30 years. Thus, assuming margins are maintained, we see ample scope for renewed growth of revenue and earnings via the corporate sector’s beta to firming US and global GDP growth. Put differently, these broad, top-down facts suggest little reason to fear that rising cost inefficiencies or declining pricing power are starting to weigh on earnings.”
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